A Carbon Price Can Benefit the Poor While Reducing Emissions

by Helen Mountford and Molly McGregor (World Resources Institute) … Recent research from the Global Commission on the Economy and Climate finds that bold climate action could deliver at least $26 trillion in economic benefits through 2030.

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On the other side of the coin, climate action can inadvertently hurt the poor if policies aren’t designed properly. The world saw this play out in France this month with the “Yellow Vests” protests. While the protests are clearly reflecting a wider anger over stagnant living standards and economic inequality, they were initially sparked in response to a rise in fuel taxes. The Yellow Vests protests, however, are not against climate action; rather, they are pro-equity, reflecting mounting dissatisfaction from rural and working-class citizens being left behind.

By creating new sources of public finance, carbon pricing initiatives can enable government investments in critical public priorities like healthcare, education or infrastructure. Alternatively, revenue can be returned directly to citizens through tax cuts or rebates. Or the revenue could be used for a combination of these measures. By using these measures to support the poor or other groups who are disproportionately affected by structural changes associated with the low-carbon transition, carbon pricing systems can be a powerful tool for supporting a just transition.

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Here are just a few examples:

Chile

Chile passed a carbon tax in 2014 as part of broader tax reforms to reduce air pollution associated with fossil fuels. The tax was designed to meet the country’s target of reducing emissions 20 percent below 2007 levels by 2020. The carbon tax of $5 per ton of carbon dioxide equivalent (tCO2e) for thermal power plants raised $145 million in government revenues in 2017. While the carbon tax increased taxes on big businesses, it was recycled in a way that lowered the tax burden for consumers.

Colombia

Colombia launched its carbon tax in 2017 at a price of $5/tCO2e. The tax generated $172 million in government revenues in 2017, which the government plans to use to support environmental and rural development projects. For sellers and importers of fossil fuels liable for the tax, they can choose to instead comply through the purchase of accredited emission offset projects located in Colombia, further directing low-carbon investments in the country. For example, one of Colombia’s largest concrete producers, Cemex, is now funding a reforestation project that will plant 500,000 trees in the country to offset its fleet of 1,200 diesel-powered trucks. Colombia also recently approved legislation to create an emissions trading system (ETS). The government will conduct economic impact studies on various ETS designs over the next three years.

Canada

Canada is a global leader in carbon pricing. Several successful systems have been in place at the provincial level for many years, and next year, the government will expand nationwide. On April 1, 2019, all provinces that do not already have a carbon price in place that meets the federal standard will be subject to a federal carbon tax of $15/tCO2e, increasing by $7.50 each year to reach $37.50/tCO2e in 2022.

The revenues collected from the federal tax will be redistributed to citizens in provinces under the federal system (including Ontario, New Brunswick, Manitoba, Saskatchewan, and Nunavut). According to the government, a majority of households in these provinces can expect to receive more in rebates than they will pay in higher energy prices. For example, the average household in Manitoba would expect to see a cost of $174, but a rebate of $252, for a net benefit of $78.

The federal standard builds on successes at the provincial level. For example, British Colombia implemented a revenue-neutral carbon tax in 2008, returning $962 million in revenues to citizens in 2017 in the form of tax rebates. Analysis has shown that low and middle-income households are better off under that tax than they would be without it. Moving forward, the province will redirect some of the revenues towards climate initiatives such as energy-efficiency retrofits. The province has also committed to reach $37.50/tCO2e in 2021, a more ambitious timetable than the federal standard.

United States

Despite inaction at the federal level, there have been some exciting carbon-pricing developments at the subnational level in the United States. For example, the Regional Greenhouse Gas Initiative (RGGI), the mandatory cap-and-trade system covering CO2 emissions from large power plants in the Northeast and Mid-Atlantic, is expanding to 10 states for its 10th anniversary next year. RGGI states raise revenues through quarterly auctions of permits for CO2 emissions.

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California’s 2012 cap-and-trade program covers 85 percent of statewide emissions from industry, power, transport and buildings. The program raised $2.03 billion in revenues in 2017.

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By law, 25 percent of funds must be allocated to projects in low-income and polluted communities. These state-financed funds have also attracted more than $8.2 billion in co-funding, leveraging an average of $6 for every dollar invested. Oregon is expected to enact a similar system in 2019, and other U.S. states committed to the goals of the Paris Agreement are considering a variety of carbon pricing initiatives as well. At the federal level, activists are calling for a “Green New Deal” that includes carbon pricing embedded in a broader agenda of economic reform, public investment, job creation and social justice. READ MORE